"from henceforth none be so hardy to tell or publish any false News or Tales, whereby discord, or occasion of discord or slander may grow between the King and his People, or the Great Men of the Realm."

What we’re seeing is not the ‘end of neoliberalism’, because most practical neoliberals never ditched the idea of stimulatory spending in a downturn. We’re just seeing the widening of a split between technocrats and ideologues. The ideologues have become an obstacle to policy which is functional for capitalism; they are being cast adrift, but no doubt they’ll be useful again.

…the reiteration of the ideologue line in the media through all the op-eds and interviews though certainly has a broad impact on the wider public’s understanding of economics, so I am not so sure that the break is going to be so clean. At least here in the States. There are a whole bunch of cranks–professional economists and not–who loathe the notion of a government deficit.

And clearly he was right. I still think the technocrats have the upper hand within most policy bureaucracies. In Australia it almost goes without saying. In the UK the situation is more complicated, with a government committed to deficit reduction. In the US, also, it looks unlikely that the degree of stimulus that is called for will get through Congress. In both these places, though, this should be qualified by the substantial stimulus that has been run these past few years – the ideologues are in the ascendancy in the media-political sphere, but it remains to be seen whether policy follows through.

In the UK the bulk of the promised cut-backs are due to come a year or two down the track. I doubt they would go ahead in the event of another downturn, whoever is in government, and I think it is a very open question whether the government will succeed in its planned program even without a downturn, since its severity will surely provoke countervailing pressure. In the unlikely event of a boom, the technocrats and the ideologues will in any case be back in alignment, although the latter will probably prefer a more drawn-out process of deficit reduction.

The US is an interesting case. Although the US government is often seen as having a strong executive, that’s clearly not the case when it comes to fiscal policy. My impression is that the President’s relationship to Congress has more in common with temporary coalition building in a multi-party hung Parliament than with a winner-takes-all system. That makes technocratic fiscal policy extremely difficult – it faces stronger problems of timing and economic rationality than in most countries. (In some ways the strongly independent Federal Reserve has evolved to compensate for that.) So the ideologues in the media-political sphere are correspondingly more potent, and with elections this year we see almost the reversal of the traditional ‘political business cycle’, where stimulus is difficult to build support for.

I have to admit to still being surprised by the know-nothingness of the likes of the Wall Street Journal, in contrast to the more technocratic financial press elsewhere in the world. This editorial from Tuesday is a case in point. It is transparent pseudo-economics all the way through, arguing first that the first round of stimulus was a failure because there was still a recession, and second that this was a result of public deficit spending ‘crowding out’ the private sector, despite the lack of apparent upward pressure on interest rates. Hilariously, it puts ‘demand’ in scare-quotes, as if it were some kooky concept dreamed up by community organisers: “Larry Summers, who would later become Mr. Obama’s chief economic adviser, made the case for such a stimulus to boost domestic ‘demand’ in late 2007.” It’s hard to see it as anything other than propaganda – but propaganda for who? Wall Street doesn’t benefit from demand restraint. It can only be Republican anti-Obamaism; it is not really a rational ideology for capital.

Showing that the technocrat-ideologue struggle is alive and well, the Economist’s economics blogger has taken to ridiculing the Wall Street Journal and its “own special brand of economics”. On the other hand, today he or she gives a good illustration of why, however much we may enjoy their beatings of the conservative ideologues, the technocrats are ultimately not friends of the left either, and why eventually they will again be the force to contend with, precisely because they are rational:

When expanded government activity generates increased interest rates, that’s a sign that the activity is coming at the direct expense of private sector expansion, and society should think very, very carefully about the return to that increased government activity. It might nonetheless be worthwhile—defending the nation from attack would fall into this category—but in general it probably means that the government should find ways to reduce wasteful aspects of its demands on the economy.

This comes from a long post I wrote on the LBO-Talk list a few weeks ago. (See it in context here.) It came out of a discussion about the embarrassing tendency for discussion among Marxists to degenerate into biblical exegesis. I wasn’t criticising Marxology as such. It’s a legitimate part of the history of thought if nothing else, and since Marx’s work still speaks pretty directly as a critique of capitalist society, it’s more than that. I also think it’s uncontroversial that appeals to authority are not legitimate arguments in anything other than disputes about what the particular authority said. My point was rather that the form and content of Marx’s political economy were partly determined by the political economy of his time, and therefore:

“the worst thing about so much Marxology is that many people who can quote the text itself back-to-front know very little about the early-to-mid-19th-century political economy that is its context and even so much of its content. If your economic methodology is to rip selections from the text 150 years out of that context, you’re often anachronistically defending the concerns and framing of Georgian and Victorian political economy rather than any particularly radical criticism of economics past or present. The ‘labour theory of value’ is a case in point – Marx’s theory points the way out of the labour theory, but thanks to the conservatism of exegesis-based economics, which freezes analysis at an earlier stage of its development, it’s become synonymous with it! Close the hermeneutic circle, people!”

Someone asked me to elaborate on the claim that Marx pointed the way out of the labour theory, and that generated my own exercise in Marxology.

Ricardo’s labour theory of value – that the rate at which commodities exchange depends on the labour-time that goes into producing them (modified by capital intensity and skill, etc) – was set up in opposition to the idea that price is determined by adding up labour-time multiplied by the wage rate plus the necessary capital times the rate of profit. (Leaving aside the complications of rent.) Adam Smith presented eclectic theories of the determination of the wage and profit rate that were basically about supply-and-demand in the markets for labour and capital. These were each plausible in themselves, but they led to a mess together because they neglected the joint determination of wages and profit. For example, you could get the impression that if wages rose, because of a rise in demand for labour, the price of each commodity would rise to the extent of the labour used to produce it, while the rate of profit would remain the same.

Ricardo emphasised that that’s impossible because given the quantity of stuff produced in a period, if the real wage rises, so that workers are getting more of the stuff, capitalists must be getting less, and given the same value of capital, the rate of profit must fall, and there would be no general rise in prices because money, the measure of value, is a commodity too. (Relative prices would change, however, because of different capital intensities.) It was basically a long-run general equilibrium critique of partial equilibrium – that you need to follow the disturbance all the way through the whole chain of effects and not just limit yourself to supply and demand in the market of the original disturbance.

And when you do this, the system actually appears simpler rather than more complex – you can cut through all the eclectic bullshit and relate relative prices to simply the labour time and capital intensity of each commodity’s production. It can seem arbitrary as to whether you consider capital intensity to ‘warp’ the field of value determined by labour time, or labour time to ‘warp’ the field of value determined by capital intensity. But Ricardo believed differences in capital intensity (and rate of turnover) between different commodities would only have a minor impact on relative prices compared with differences in labour time – as George Stigler put it he had a “93% labour theory of value”. So it made more sense to say labour-time determines value but capital intensity modifies it.

Marx fully accepted all this as an advance on Smith and was often dismissive of mere ‘supply and demand’ analysis, which he portrayed as just determining short run fluctuations around long-run prices-of-production – again, it’s essentially a general equilibrium criticism of partial equilibrium analysis. He was much more specific than Ricardo about all the qualifications – insisting, e.g., on ‘socially necessary’ labour time – and I doubt Ricardo would have disagreed with this.

But from Ricardo’s time and Marx’s time the labour theory was pretty controversial – Ricardo dominated English political economy, but as a polariser rather than as someone everyone agreed with. And there were a lot of legitimate problems – most notably, the awkwardness in saying relative labour-time determines relative value, but then that relative capital intensity modifies the relationship. (Partial equilibrium) supply-and-demand analysis continued to be refined, and could take into account effects of one market on another and so on – it was much better at picking holes in the Ricardian theory than building a full alternative system. John Stuart Mill’s 1848 texbook presented a synthesis of Ricardo and these developments and superseded Ricardo’s Principles as the basic text of political economy until Marshall.

Marx was full of contempt for Mill and stayed old-school, which essentially meant prioritising long-run general equilibrium over short-run partial equilibria. His presentation made the ‘transformation’ from labour-time determined values to prices-of-production modified by relative capital intensities seem even more awkward – since he hardly mentions the need for this until Volume 3. Engels urged him to make it clearer from the start, and it’s debatable why he didn’t (his reply to Engels was flippant – that he deliberately wanted to piss off ‘vulgar’ economists).

I think it’s because of his method of presentation – he needs a basic concept of value to build the concept of capital, and can’t present the effects of capital back upon value until capital is fully ‘constructed’. Also there’s an awful lot you can say about distribution and fluctuations at a macro level without worrying about relative prices – Keynes would use labour-time as his basic unit of value at a macro level too. But if that’s the case, it follows from the Volume 3 analysis of competition that as far as relative prices are concerned, the (socially necessary) labour time values of Volume 1 are epistemological devices, _not_ ontological – i.e., labour-time value – in the microeconomic sense of relative prices – doesn’t exist in real capitalist economies, ‘under the surface’ or otherwise. Wherever labour-values are used in this microeconomic sense in Volume 1, you can go back after Volume 3 and read ‘prices-of-production’ instead.

But ‘the transformation’ is basically a restatement of Ricardo. The interesting thing is where the analysis of competition and prices-of-production in Volume 3 goes way beyond the ‘transformation’. In my opinion this is where Marx really points the way out of the Ricardian labour theory of value. It becomes clear that supply and demand – as modern economics conceives them – actually do play a role in establishing long-run values and prices-of-production, not merely the fluctuations around them. Marx’s problem with supply and demand analysis _as he knew it_ was that it didn’t explain what determined supply and demand at any given price. In modern neoclassical terms, the answer is supply and demand schedules which relate demand and supply to the range of possible prices.

Marx more-or-less develops the idea of supply and demand schedules in the chapters on competition in Volume 3. It follows naturally from his emphasis that value depends on ‘socially necessary’ labour time. ‘Socially necessary’ has a dual meaning. On the one hand, for single kinds of commodities, it refers to the fact that thanks to competition between producers, those commodities produced with relatively inefficient production processes obviously don’t sell for more. On the other hand, it refers to society’s allocation via the market of labour to different kinds of commodity in proportion to society’s needs (ultimately determined by who can pay, of course – and Marx emphasises the dependence of demand on distribution in Vol. 3, Ch. 10 – p. 282 of the Penguin edition).

Now, thanks to economies of scale etc., the amount of labour necessary to produce a particular commodity depends on how much of the commodity society demands. For example, it’s way more expensive per unit of steel to produce 100 tons of steel a year than it is to produce 1,000,000 tons of steel. So ‘socially necessary’ in the first sense depends on ‘socially necessary’ in the second sense – that is, the cost of steel depends on the demand for steel. But at the same time, the amount society demands of a particular commodity depends on its price relative to substitutes – so the demand for steel depends on the cost of steel. The only way to resolve this dilemma is to think in terms of supply and demand schedules – and this is in effect what Marx does.

For example, in explaining how the rise in price of a raw material affects the profit rate of the producer, Marx explains that it depends on how much the capitalist will raise his own price, which depends on his calculations of how it will affect demand – in other words partly on the price elasticity of demand for his product:

It is evident… that the expansion or contraction of the market depends on the price of the individual commodity and stands in an inverse relationship to the rise or fall in this price. It happens in fact, therefore, that a rise in the price of raw material does not lead the price of the manufactured product to rise in the same proportion, or to fall in the same proportion when the price of the raw material falls.” [vol. 3, ch. 6, p. 203 in the Penguin edition]

Another example from vol 3 ch 10 (p. 279 of the Penguin) where Marx basically edges towards the concept of demand (in)elasticity:

At a given price, a species of commodity can only take up a certain area of the market; this area remains the same through changes in price only if the higher price coincides with a smaller quantity of commodities and a lower price with a greater quantity. If the demand is so strong, however, that it does not contract when price is determined by the value of commodities produced in the worst conditions, then it is these that determine the market value.

The point of these quotations is not to say, ‘aha, Marx anticipated Marshall’. These are fragments that are not developed into a coherent statement, and the section is unfinished. It is, rather, to say

(1) that Marx himself recognised, at least implicitly, that determination of relative price by labour-time cannot be causally prior to demand in the market, because the size of the market for a commodity enters into the determination of the labour time necessary to produce it (due to economies of scale, etc); and

(2) that Marshallian (neoclassical) concepts can be a useful tool for dealing with this kind of question more systematically than Marx did.

Now, there’s also a debate in the literature about the extent to which John Stuart Mill anticipated Marshallian demand and supply curves. It certainly wasn’t only Marx that was groping in this direction. It’s generally accepted that Marshall got the idea from Cournot rather than Mill – but the point is it was in the air of Victorian political economy. Many of the early neoclassicals defined themselves as anti-Ricardians, arguing especially that he neglected the influence of demand. But Marshall argued in an appendix to his Principles that Ricardo did in fact implicitly incorporate it and even anticipated the distinction between marginal and total utility. He understood that the purpose of Ricardo’s labour-time theory was to go beyond the immediate supply-and-demand in the market – because if high demand raised a price and thereby profits, capital would move into that line and bring labour with it – so that ultimately labour-time, as a cost that enters into every commodity, regulates relative prices in the long run. Marshall believed this still to hold, although because of economies of scale etc, labour-time would be affected by the demand schedules for each product, just as Marx recognised.

In other words, the labour theory of value was thus a step towards equilibrium theory and a real advance over vulgar supply-and-demand theory. But conceptualising demand and supply as schedules opened the way to superseding vulgar labour-value theory in turn. When Marxists stick to the letter of Capital and quote Marx’s dismissals of supply and demand as determining nothing, and think this holds against neoclassical conceptions of supply and demand, they are falling into anachronism. Even if the neoclassical vision is problematic, the fact remains that it’s not what Marx was dismissing, and they therefore miss the opportunity to engage productively.

The thesis is finally done – ‘Inflation and the making of macroeconomic policy in Australia, 1945-85’. There will be an online version eventually, once it’s marked and corrected.

Anyway I think I might now have the time and energy to revive things here, though there probably won’t be much content on inflation, macroeconomic policy, Australia, or the decades 1945-85 for a little while.

The plan is to use this site more for scraps, notes and conversation – that is, what a blog is meant to be for – and I’ll try and put more substantive pieces elsewhere. One reason I want to revive Scandalum Magnatum is that Sydney friends have put up blogs so I now have locals to link to. Dr_Tad and liz_beths have started Left Flank, focused on Australian politics. They have kicked off with an excellent series of posts on the Federal election and some constructive criticism of the Greens. On a more philosophical plane is Jonathon Collerson’s Wrong Arithmetic – and also check out the group blog associated with a Sydney Capital reading group which has achieved the rare feat of continuing to exist long enough for an attempt on Volume II.

I’m more of a fan of Guy Rundle than Slavoj Zizek. Now the former has reviewed the latter’s First as Tragedy, Then as Farce. It’s a generally positive review – it’s good as motivational literature apparently – but it makes the following point about a certain brand of philosophical Marxism that has been pretty fashionable these last few years, a point I think is spot on:

The question Žižek perhaps does not face is whether invoking the idea of communism for the relatively unspecified transformation he suggests acts as a form of focus, and a renewal of possibility, or a slaking-off of energy by taking on the glamorous role of spectre, the – hushed tones – ‘communist’. It is not ridicule that is the greatest risk, but an easy resort to an historically given role, which not only refuses to connect to current struggles or movements, but on whose ideal content one is equally silent.

If you start worrying about what you are going to call a movement, before you actually get on with building it, are you firing your guns too early? After all, it is potent movements – from Methodism to Big Bang physics to Marxism itself – which have been named by their enemies, a moment of recognition of their real status. Meanwhile it is the most ephemeral and/or dated movements – Theosophy, Christian Science, fissiparous late Trotskyism – that wasted so much energy arguing over names.

[…]

Since the act of self-describing is rhetorical anyway, its only criteria of judgement is whether it gets some sort of effect – or whether it instead rushes to get a dividend from a process of getting people to think otherwise what, at this stage, needs to be more concrete and particular, albeit not fragmented and ungrounded in postmodern fashion.

The third annual report of the Workplace Research Centre’s Australia at Work project came out today. It’s a longitudinal study of the reported experiences of more than 6,000 workers. This year’s was bound to be interesting because it reports the effects of the ‘crisis’ over the last year. Apparently falling interest rates and petrol prices, as well as the stimulus package, have had a broader impact than un(der)employment:

The event that arguably had the most impact on the Australian economy and labour market in 2008 was the Global Financial Crisis (GFC) in October. While expectations that the Australian economy would go into a technical recession were unmet, the impact was felt through a rise in unemployment and reports of further reductions in working hours. However, this report finds that only small sections of the workforce have endured negative impacts from the economic downturn. Around 8 per cent of all respondents report losing a job in the last year, and around two-fifths of these people are now in a job. While the levels of job insecurity remain very low among Australian employees, there has been an increase between 2008 and 2009, from 7 to 12 per cent. Insecurity is higher among private sector employees, at 14 per cent in 2009.

There have been some positive changes that have resulted from the economic downturn. While reports of increased living costs peaked in the first half of 2008, the GFC saw Australian interest rates plummet, petrol prices return to previous levels and the Government distribute a series of stimulatory cash hand-outs. The ease on costs of living is reflected in respondents’ reports of living standards. The proportion of people finding it ‘very difficult’ or ‘difficult’ to get by on their current household income has dropped from 20 per cent in 2008 to 16 per cent in 2009. Correspondingly, those ‘living comfortably’ or ‘doing really well’ has increased from 41 to 45 per cent in the same period. [p. i]

The Economist (now behind a paywall) had a couple of features last week claiming that music piracy was “in decline”. The claim was based partly on a survey of British internet users in which the percentage reporting usage of file-sharing networks declined from 22% in December 2007 to 17% in July this year. What it didn’t mention is that you don’t need file-sharing software to pirate music anymore since it’s all over the web in plain Googlable sight.

It also cited a Swedish survey in which 60 per cent of former file-sharers claimed to have cut down or quit, with half of them moving to the legal ad-supported Spotify. If such a free (or near-free) service is available in a country, it’s not surprising a bunch of people would quit bothering with piracy. But it’s hardly the case that the pirates lost: rather they won, cutting a lot of the commercial value out of music recordings and massively increasing the quantity people get to listen to.

A couple of good essays on the social and musical impact of piracy over the decade: Eric Harvey’s at Pitchfork is more detailed. But Jace Clayton – who as DJ /rupture is without a doubt on my list of top ten musicians of the decade – is able to be unambiguously celebratory in a way an industry advertising funded site can’t really be, and without lip service to ‘alternative business models’ blah blah blah.

The first in an occasional series. Now I don’t really know my syllogisms from my enthymemes, so further translation may be required. Sydney Morning Herald op-eds do not necessarily lend themselves to a logical treatment, and I have taken the liberty of supplying some unstated but necessary propositions. In other cases, I have unable to discern the missing propositions and have accordingly left them out. Unfortunately, this means not all premises lead to conclusions and not all conclusions derive from premises.

Twelve years ago I was arrested on New Zealand Parliament Grounds during a protest, along with 74 others. It was my first year of uni. A bunch of us later sued the government for arbitrary arrest and false imprisonment. This year Beggs v Attorney General finally reached a conclusion with a settlement offer. (It’s in my name by accident of alphabetical order.) I banked the cheque today. A formal apology is apparently on the way. Cheers to Tony Ellis who saw it all through, after defending us for free, for this and for generally inspiring fear and loathing in the hearts of cops and Crown prosecutors over the years. Also to Tony Shaw and everyone else who worked on the case.

No country has managed to eliminate the business cycle. No country ever will, because the cycle is driven by human psychology, which finds expression in financial behaviour as well as ‘real’ behaviour. We are seemingly just made – ‘hardwired’, as some would put it – in a way that makes us prone to bouts of optimism and pessimism. Occasionally, we are prone to periods of myopic disregard for risk followed, in short order, by an almost complete unwillingness to accept risk. [p. 2]

‘Behavioural finance’ is one of the new big things in economics. It ditches the assumption of rationality but keeps the methodological individualism.

Better explanations for booms and busts ditch the methodological individualism, and it follows from that that psychological states don’t matter so much. Rationality we can actually keep, but (1) bureaucratic rather than personal rationality, (2) embodied in a variety of fundamentally different kinds of institution, and (3) bearing in mind that ‘rationality’ does not mean ‘omniscience’ and certainly not ‘knowledge of the future’. (The last might go without saying, but the term has slipped a long way in economic theory.)